Mark Mulligan's Blog

Apple’s announcement at Macworld on Tuesday that they drop
DRM from the iTunes Music Store catalogue is an intriguing mix of necessary
development and non-event. DRM
really should already have disappeared from premium digital music stores long
ago, and the digital music market is not suddenly going to accelerate because
this is now happening. And yet the
DRM-free move is an important enabler for the long term viability of the
digital music sector. Consumers expect
to be able to play music when, where, and how they like. That’s what decades of the CD has taught
them. Only DRM-free music offers the
same freedom. But there aren’t hoards of
would-be music buyers waiting for DRM to drop. Rather, this is about removing barriers to entry for long term organic
adoption by more mainstream consumers.

The short-term benefits of this initiative are almost all
Apple’s:

Apple customers get a better music buying experience

Apple mitigates the first hints of competitive advantage that the likes of Amazon and 7 Digital had via their own MP3 catalogue

The fact that Apple can now sell to other MP3 player owners
doesn’t even register. Apple are in the
business of selling devices. They sell
services to enhance the value proposition of the devices. Apple are not in the digital music business
for the sake of selling music. In fact,
it is such a low-margin business for them that it could almost be preferable
for them not to sell into non-Apple devices.

So the rest of the digital music stores that make up the
small remainder of the non-iTMS digital music market needn’t worry too much
about Apple stealing their customers. But they do need to accept the fact that they’re now less likely to
steal customers from Apple. They now
need to focus hard on differentiating via other factors such as pricing,
programming and discovery.

So the benefit is predominately Apple’s. But there is important precedent here for
other hardware companies such as Nokia and Sony Ericsson. Both have launched their own twist on the
locked-ecosystem that Apple pioneered with iTMS / iPod. But crucially their offerings (Comes With
Music and Play Now plus) focus on providing music on a free or near-to-free
basis to consumers, using DRM to mitigate misuse. Removing DRM from the premium download stores
puts vital clear blue water between them and these offerings. Thus DRM will be increasingly used to
differentiate premium stores from subsidized and ad supported download services
(e.g. Qtrax, Spiral Frog). In short, the
more you pay, the less DRM you have to tolerate.

So this is very much a case of ‘DRM is dead, long live DRM!’
with Apple as the near-term winners and the broader market benefiting in the
longer term.

Comments

Plus, of course, there's the small matter of a few million dollars in revenue which Apple gets from people "upgrading" previous purchases to their DRM-free equivalents. I did a quick back-of-the-envelope calculation which leads me to believe Apple will make around $90 million if 5% of songs sold so-far are upgraded. Of course, that's not clear profit - but in a tough economic climate, every few million counts.